What is Bitcoin - Part 2
If you missed the first part of the Introduction to Bitcoin and Cryptocurrencies, we highly recommend reading it [here].
What is Bitcoin Mining?
Mining is the process of expending computational power to process transactions, secure the network, and keep all participants in the system synchronized. It can be likened to Bitcoin’s data center, except that it is designed to be fully decentralized, with miners operating in all countries and no single entity having full control. This process is called "mining" by analogy to gold mining, as it is also a mechanism for issuing new Bitcoins. Unlike gold mining, Bitcoin mining provides rewards in exchange for essential services needed to operate and secure the payment network. Mining will remain necessary even after the last Bitcoin is issued.
How Does Bitcoin Mining Work?
Anyone can become a Bitcoin miner by connecting specialized hardware and software to the network. Mining software listens for transactions broadcast through the peer-to-peer (P2P) network and performs the necessary tasks to process and confirm these transactions. Bitcoin miners do this work because they can earn transaction fees paid by users for faster processing, as well as new Bitcoins created according to a fixed formula.
For new transactions to be confirmed, they must be included in a block along with mathematical proof of work. Such proofs are very difficult to generate, as there’s no way to create them except by performing billions of calculations per second. This requires miners to carry out these calculations before their blocks are accepted by the network and they are rewarded. As more people start mining, the difficulty of finding valid blocks automatically increases to ensure the average time to find a block remains around 10 minutes. As a result, mining is a highly competitive business where no single miner can control what is included in the blockchain.
The proof of work is designed to depend on the previous block, establishing a chronological order in the blockchain. This makes it nearly impossible to reverse previous transactions, as it would require recalculating the proof of work for all subsequent blocks. When two blocks are found simultaneously, miners working on the first block they receive switch to the longest blockchain as soon as the next block is found. This allows mining to secure and maintain a global consensus based on processing power.
Bitcoin miners cannot cheat by increasing their own rewards or processing fraudulent transactions that could corrupt the network. All Bitcoin nodes will reject any block containing invalid data as per the network protocol’s rules. Consequently, the network remains secure, even if not all Bitcoin miners can be trusted.
Here’s a very modern question from "environmentalists"...
Does Bitcoin Mining Waste Too Much Energy?
The short answer is NO. The competitiveness of Bitcoin mining and the rewards it offers have driven significant advancements in renewable energy and green energy technologies. Bitcoin pushes the development of new energy production technologies, as miners seek cheaper, more efficient, and competitive ways to generate power to gain an edge over other miners in the network.
The long answer is:
Expending energy to secure and operate a payment system can hardly be called wasteful. Like any other payment service, using Bitcoin incurs operational costs. Services required for widely used monetary systems today, such as banks, credit cards, and armored vehicles, also consume significant energy. Unlike Bitcoin, their total energy consumption is not transparent and cannot be easily measured. Mining was designed to become more efficient over time through specialized hardware that consumes less energy, ensuring operational costs remain proportional to demand. When mining becomes too competitive and less profitable, some miners choose to stop. Moreover, all energy expended in mining is ultimately converted into heat, and the most profitable miners will be those who use this heat effectively. An optimally efficient mining network is one that doesn’t consume additional energy. While this is the ideal scenario, the economics of mining are such that miners independently strive toward it.
How Does Mining Enhance Network Security?
Mining creates the equivalent of a competitive lottery, making it very difficult for anyone to consecutively add new blocks of transactions to the blockchain. This protects the network’s neutrality by preventing any individual from blocking certain transactions. Mining also prevents participants from replacing parts of the blockchain to roll back spent funds, which could be used to defraud other users. Mining makes reversing a past transaction exponentially harder, as it requires rewriting all blocks following that transaction.
Can I Start Mining Bitcoin?
In the early days of Bitcoin, anyone could find a new block using their computer’s CPU. As more people started mining, the difficulty of finding new blocks increased significantly, to the point where the only cost-effective method is using specialized hardware. You can visit specialized websites for more information. Today, cryptocurrency mining is so advanced that, unfortunately, only large, highly competitive enterprises have a place in it, as mentioned earlier.
Is Bitcoin Secure?
The Bitcoin technology—its protocol and cryptography—has a high level of security, and the Bitcoin network is likely the largest distributed computing project in the world. The most common vulnerability in Bitcoin comes from user errors. Bitcoin wallet files storing the necessary private keys can be accidentally deleted, lost, or stolen. This is similar to storing physical cash, but in digital form. Fortunately, users can employ best security practices to protect their funds or use service providers offering strong security and insurance against theft or loss.
Has Bitcoin Ever Been Hacked?
The protocol and cryptography used in Bitcoin have remained functional years after its inception, a strong indicator of a well-designed concept. However, security flaws have been found and fixed in various software implementations. As with any software, Bitcoin’s security depends on how quickly issues are identified and resolved. The more issues discovered, the more Bitcoin evolves and improves. The protocol itself has never been hacked. However, many users have lost coins due to wallet hacks resulting from poor or nonexistent efforts to secure their funds.
There are often misconceptions about thefts and security breaches occurring on various exchanges and businesses. While these events are unfortunate, none indicate that Bitcoin itself was hacked or suggest flaws in its security—just as a bank robbery doesn’t mean the dollar is compromised. However, a comprehensive set of best practices and intuitive security solutions is needed to better protect users and reduce the overall risk of theft or loss. Over the past few years, such security features have been rapidly developed, including wallet encryption, offline wallets, hardware wallets, and multi-signature transactions.
Can Users Abuse the System?
It’s impossible to alter the Bitcoin protocol easily. Any Bitcoin client that doesn’t follow established rules cannot impose its own rules on other users. Per current specifications, double-spending on the same blockchain or using Bitcoins without a valid signature is impossible. Thus, creating excessive Bitcoins out of thin air, spending another user’s Bitcoins, hacking the network, or similar actions cannot be done. However, a majority of miners could choose to block or reverse recent transactions. A majority of users could also push for certain changes to be adopted. Since Bitcoin only works with the full consensus of all users, changing the protocol is very difficult and requires an overwhelming majority to adopt changes, leaving others with little choice but to follow. It’s hard to imagine why a Bitcoin user would accept any change that could jeopardize their financial well-being.
Is Quantum Computing a Threat?
Yes, most systems relying on cryptography, including traditional banking systems, are vulnerable. However, quantum computers don’t yet exist and are unlikely to appear soon. If quantum computing becomes an imminent threat to Bitcoin, the protocol can be upgraded to use quantum-resistant algorithms. Given the significance of such an upgrade, it’s expected to be thoroughly developed by developers and adopted by all Bitcoin users.
Source: We reiterate that much of this information is sourced from bitcoin.org. Don’t miss visiting the site to continue your Bitcoin education.
